Monday, 31 May 2010

Red tape is your (very expensive) friend?

AirSea's odyssey illustrates one of the key problems preventing Greece from generating the economic growth it needs to pay off its heavy debts: Critics say a sprawling civil service has tried to secure its own survival through an opaque patchwork of fees, taxes and red tape. The European Commission estimates the administrative burden of Greece's bureaucracy—the value of work devoted to dealing with government-imposed administration—is equivalent to 7% of gross domestic product, twice the EU average.

You have to ask what effect such costs have on entrepreneurship within Greece and its effect on foreign investors. It has to be deterring economic growth increasing activities by both groups.

The article goes on to say

Tourism is Greece's top money earner. But despite the country's magnificent coastlines and ancient monuments, many visitors are young people traveling on a shoestring. Operators trying to attract higher-end tourists say ham-handed government moves have driven business away.

This past August, for example, Athens imposed a new tax on yachts in an effort to close its budget gap. A 43-foot craft under a foreign flag was levied $5,265 a year if it had spent more than 40 days a year in Greek waters since March 2009. For a 98-foot boat, the charge was about $27,000.

The new tax "was a squeeze-the-rich measure, so they just left," withdrawing a much-needed source of crew salaries, port fees, fuel taxes and onshore spending, says Peter Custer, marketing and sales manager at Privatsea Yachting, a yacht-services firm in Athens. (Emphases added)

People respond to incentives, by and large if you tax something you get less of it, and that can mean less economic actvity just at the time you need it most, as Greece now does.